Rolling Over An Old 401K Plan. Should You Do It?

If you left your job for a new one or were laid off, odds are you left your old 401k plan at that employer. You probably thought you would take care of it later or maybe you never even thought twice about it. But forgetting about it is the last thing you want to do. And the reason isn’t just because in 20 years you may completely forget about it, though that is a valid reason.

The real reason you want to do something about that old 401k plan is because you can potentially save money and invest more into the account. How do you do these things? Read on to find out more.

Why It Makes Sense To Roll Over Your Old 401k Plan

It’s no secret that most 401k plans are loaded with fees. Most of the fees are “hidden” to the end user, so you have no idea exactly how much the plan is really costing you. When I worked for a high net worth planning firm, we analyzed a lot of small business 401k plans. The total fees the participants (that’s you and me) were paying was over 2% and in some cases close to 4%! That is just plain ludicrous.

So, for this reason you want to look into rolling over your 401k plan. Don’t worry about wondering what your options right now, I’ll talk about that below.

Another reason it makes sense to roll over your 401k plan is to keep investing for retirement. When you leave a job, you can no longer add more money into that plan. Since the key to investing is compound growth, the more you can keep saving in the account, the more the account will compound upon itself and grow into larger and larger amounts.

Where To Roll Over Your Old 401k Plan

So now that you see why it makes sense to roll over your 401k plan, where exactly should you roll it over to? You have two main options here:

If you have a new job and a new 401k plan, you can potentially put it in there.

You can also roll it over into an IRA.

Option #1: New 401k Plan Let’s first look at the new 401k plan. There are two catches with this option. The first is whether or not the new 401k plan allows for rollovers. Some do while others don’t. Be sure to check first to make sure yours does.

The second issue is cost. As I previously mentioned, many 401k plans are very costly. The problem is you won’t know this. But it is safe to say if your 401k plan is run by a firm like Vanguard, Fidelity or Schwab, costs will be low and it makes sense to roll over your old 401k.

If however your 401k plan is managed by an insurance company, then the fees will tend to be high and you should look into option #2.

Option #2: Rollover IRA This is a great choice because you can control the costs ñ since you decide where to open the account ñ and you can control the investments. Most 401k plans limit you to a handful of investment choices but with a rollover IRA, you can essentially choose any mutual fund, ETF or stock you wish to invest in.

When it comes to opening your account, stick with the low cost providers I noted above – Vanguard, Fidelity or Schwab. You can even consider T Rowe Price as well.

Final Thoughts

At the end of the day, you don’t want to leave your old 401k plan at a previous employer. While it makes sense to not act right after leaving your job so you can see what your new 401k plan looks like, you want to act sooner rather than later. This will ensure that you don’t completely forget about the account and so that you can take advantage of the compounding of future money.

Doing this will help you to achieve the money you need to fund your retirement and who knows, maybe you will get there sooner by using your old 401k plan to your advantage rather than leaving it sit idle.

Hi, I'm Corey Fick. I'm a husband, college graduate, young adult, and non-profit manager. I enjoy learning new things about personal finance and sharing them with my loyal readers. Join the conversation.

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